The Week in Public Finance: Nassar Scandal Could Prompt MSU Downgrade, Tax Reform in the States and Green Bond Growth

A roundup of money (and other) news governments can use.

Former Michigan State University President Lou Anna Simon submitted her resignation Wednesday. (AP/Al Goldis)

Michigan State's Credit Rating Could Be Downgraded

Citing fallout from the Larry Nassar sex abuse case, Moody's Investors Service is reviewing Michigan State University's credit rating for a potential downgrade. The review, which could affect $975 million in debt, “will focus on any financial, legal or reputational impacts on the university,” said Moody’s. The ratings agency added its analysis would also consider “potential negative implications for the university's student demand and fundraising.”

In January, a judge sentenced Nassar, who was a longtime physician for the university and USA Gymnastics, to up to 175 years in prison for sexual misconduct. Nassar's history of abuse involved more than 156 girls and women and spanned more than two decades. Michigan State is also facing civil lawsuits from more than 100 women who allege that the university turned a blind eye.

Nassar’s conviction prompted the resignation of the university's president, the athletic director’s early retirement, and a slew of investigations by federal departments, lawmakers and the National Collegiate Athletics Association. The university’s response to the management turmoil and increased scrutiny “will weigh heavily in our analysis,” Moody’s said.

The Takeaway: In the financial short term, Michigan State is in a good position: As Moody’s noted, it has an undisclosed amount of insurance coverage and about $1.5 billion in cash on hand. The bigger question is whether the Nassar case could damage the university’s reputation and appeal in the long term.

On that note, Michigan State has a couple of things going for it. The university currently holds the second-highest possible rating and has strong enrollment and donor support.

Still, Penn State University, which also had strong enrollment and a high credit rating, was ultimately downgraded by Moody’s in 2012 after assistant football coach Gerry Sandusky was convicted of sexually abusing boys for years. The credit rating agency cited the “substantial financial impact” to the university in its action.

Reacting to Tax Reform’s State Budget Impact

There has been a lot of discussion around how exactly the new tax law will impact state tax revenues. This week, the nonpartisan Tax Foundation released one of the most comprehensive looks yet.

Even though the federal tax overhaul made more substantial changes to corporate than personal taxation, the foundation says the changes to the personal income tax “are of far greater significance to state government finances.” That’s thanks in large part to corporations’ small role in state budgets: the corporate income tax only accounts for 3.7 percent of state tax revenue on average.

The changes to the income tax, specifically the base-broadening provisions, such as the cap on the state and local tax deduction, are why many states are expecting to see more revenue as a result of the changes at the federal level. Of the 13 states which have attempted a revenue impact statement, most expect to see a few hundred million in additional revenue in the next fiscal year. Two -- Montana and Oregon -- could see slight revenue drops of around $40 million. And others, such as Minnesota and New York, could approach $1 billion in additional revenue.

The Takeaway: The foundation suggests that this could be a “golden opportunity” to do more than just react to the federal tax overhaul. States could rethink their own tax codes, the report notes, just as nine states (Arizona, Colorado, Kansas, Maine, Minnesota, Nebraska, New York, North Carolina and West Virginia) did after the Tax Reform Act of 1986.

At a minimum, however, the foundation advises against decoupling from the federal tax definitions for income and favors changing rates or exemptions. For example, after 1986, 18 states reduced individual income tax rates, 23 increased the standard deduction and 22 increased the personal exemption.

Green Bonds’ Luscious Growth

After a year in which hurricanes and wildfires wreaked havoc on scores of cities across the country, some are predicting that 2018 will be a big year for so-called green bonds. A record $20 billion in total issuance has been predicted -- a near-doubling of last year’s record $11 billion in green bonds issued.

California and New York are -- by a wide margin -- the country’s top two green bond issuers, accounting for nearly $10 billion of the total issuance in 2017. The bonds, which are tax-exempt and finance projects meeting certain environmental standards, are issued for things such as low carbon transit projects and sustainable water management.

The Takeaway: The rise in green bonds comes as states and localities are increasingly taking charge of their own environmental policy. Justine Leigh-Bell, director of market development for the Climate Bonds Initiative, predicts green bonds will be an important tool for cities and states as they develop their strategies for responding to climate change. “It is encouraging,” she says, “to see U.S. cities and states making strong commitments to implement their own climate action plans in light of Washington’s retreat from the Paris Agreement.”